Taiwan to Re-Enter Talks on Yuan Investment Quota After Protests

Taiwan’s regulators plan to renegotiate an agreement to invest yuan in China’s capital markets and separate the pact from a beleaguered cross-strait trade deal, according to a senior official.

Financial Supervisory Commission officials will meet China Securities Regulatory Commission representatives in September to negotiate for a Renminbi Qualified Foreign Institutional Investor quota for Taiwan, FSC Deputy Minister Jennifer L. Wang said in a July 9 interview. China is expected to seek a new set of terms, Wang said, without elaborating.

China allowed Taiwanese investors to repatriate their yuan via its financial markets more than a year ago as part of a broader trade agreement signed in June 2013. The deal, which would have also opened up banking, hospitals and other sectors across the Taiwan Strait, has languished after student-led protests against closer economic ties with China shut down Taiwan’s legislature for more than three weeks this year.

“If we are able to negotiate a new RQFII agreement, we don’t see any implementation issues,” Wang said. “But this type of agreement isn’t as binding as a trade agreement, it’s more subject to change.”

Germany and South Korea received RQFII quotas this year as the world’s second-largest economy continues to push for greater internationalization of its currency. Hong Kong, Singapore, the U.K. and France already have quotas. Taiwan investors accumulated 290.1 billion yuan ($46.8 billion) in bank deposits by the end of May, according to the island’s central bank, after lenders began taking such funds last year.

Political Issues

Chinese officials said at a meeting in Taipei in January 2013 that they were considering a 100 billion yuan quota for Taiwan, which would be greater than amounts granted to other locations, except for Hong Kong’s 270 billion yuan.

Taiwan and China have been separately governed since forces led by Chiang Kai-shek fled to the island in 1949 during a war for control of the mainland. China’s military still has 1,200 missiles aimed at Taiwan, according to a February report from the U.S. defense department. The first official cross-strait contact between governments in February this year was followed by anti-China, pro-democracy student demonstrations in the spring.

The political divide manifests in Taiwan’s financial regulations as well. Its so-called Formosa bond, or yuan-denominated debt, market features a limit on the value of yuan securities Chinese companies can issue in Taiwan to 10 billion yuan. By contrast, about 72 percent of the 129 billion yuan of corporate debt issued in Hong Kong’s Dim Sum market so far this year has come from Chinese companies, according to data compiled by Bloomberg.

More Options

Programs such as RQFII would give Taiwanese investors more options to invest in yuan-denominated products, according to Henry Lin, the Taipei-based chairman of the Securities Investment Trust and Consulting Association of the Republic of China.

Wang’s FSC oversees an insurance industry that had $497.4 billion in assets under management at the end of 2013, according to the regulator’s data. The bulk of the assets is held by life insurers such as Cathay Life Insurance Co., which, according to a local industry group, has 28 percent market share in terms of premiums.

In an effort to open up investment avenues for these funds, the regulator has relaxed restrictions on insurers holding foreign currency-denominated assets and could further ease rules on products such as structured notes and foreign-exchange derivatives by the end of this year, Wang said.

Insurance Companies

“We’d like to see what the insurance companies are buying when they go overseas, and we think that if Taiwan’s financial industry can provide those products, there’s no reason to let others reap the profits,” Wang said.

An incident this year involving products called yuan Target Redemption Forwards, where nine financial institutions were penalized for faulty yuan derivative sales, was “a good lesson,” Wang said, resulting in better client-risk profile assessment procedures within Taiwan’s financial industry.

Taiwan’s limit on Chinese bond issuances will “definitely” be raised this year, Wang said.

“But we aren’t only looking at Chinese issuers,” she said. “For example, we would like Taiwanese companies and other foreign companies to come and issue in Taiwan, too.”

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